FCA rules change redress calculations

NOTE: This page is based on the regulatory position at the time of writing. We will update this page as new information in relation to the proposed FCA redress scheme is available.
 

The FCA final rules for the motor finance redress scheme changes the way firms must calculate redress, adding additional layers to what was already a complex series of calculations. The updated approach has the potential to result in substantially different redress, even when many of the primary loan factors are similar. Firms must ensure that the way they calculate redress is aligned to the FCA rules. Not doing so carries the risk of consumers being materially over or undercompensated. This may result in escalating costs as firms pay consumers more than they are owed or must review compensation payments that get challenged.
 

Key changes to the calculation

In March 2026, the FCA released final rules (pending the outcome of the legal challenges). This updated numerous elements of the redress calculation that was initially released in the October 2025 consultation document.

There are now changes to the following:

  • The criteria required to meet ‘Very High Commission status’, i.e. either a tied relationship or a DCA is now sufficient (alongside the very high commission threshold requirements);
  • The Remedy selection logic for ‘Very High Commission’ loans, i.e. no longer the maximum of either the Commission Remedy or the APR-Adjustment Remedy;
  • The “market” adjustment of loan APRs for earlier in-scope loans (prior to April 2014) is -21%, with later in-scope loans at -17%;
  • Introduction of three caps to the Hybrid Remedy.
 

The FCA has also adjusted its approach to redress in some ways that have had relatively significant impacts on the redress calculation logic. These are:

  • Formally separating the redress scheme in two: pre- and post- April 2014; and
  • Asserting that the amount of commission paid by the lender to the broker/dealer will be the upper bound (see Final Rules, pg. 205).
 

The FCA’s decision that the Commission Repayment Remedy should be the maximum possible redress paid to a consumer, means changes to the calculation logic. This includes the introduction of the first Hybrid Remedy cap to ensure that it does not exceed the Commission Repayment Remedy due to a possibly higher APR-Adjustment Remedy.

The FCA has justified the other hybrid caps as: “consumers should reasonably be expected to have paid some minimal cost of credit”, and that the consultation rules would have resulted in some consumers receiving a redress payment greater than what they actually paid.

  • The first Hybrid Remedy cap is equal to 90% of the Commission Repayment Remedy.
  • The second Hybrid cap (Adjusted Realised Total Cost of Credit cap) requires the same calculations as the APR-adjustment Remedy of overcharge and interest for each payment but replaces the Market-adjusted APR with the FCA’s value of the 5th percentile APR of the motor finance loans provided in each year (see Table 7 of the Final Rules).
  • The third Hybrid cap is a simpler version of the second cap, that is suited for loans where key information is missing. It is calculated as the total cost of credit with compensatory interest accrued from the start of the loan.
 

Commission amounts can have a dramatic effect on redress

Differences in commissions paid to brokers will affect the remedy used for calculating redress. In our modelling we have seen variances of over £2,500 for a single redress payment, even where the primary factors of the loan are the same. For example, a DCA loan for £8,000 at 16% APR, over 48 months, starting in March 2008, with a total credit cost of £2,874 results in starkly different redress amounts where differing levels of commission were paid by the lender to the broker/ dealer:

  • a £2,000 commission results in redress under the Commission Remedy with a consumer redress payment of £3,356
  • a £1,500 commission results in redress under the Hybrid Remedy with a consumer redress payment of £1,713
  • a £500 commission results in redress under the Hybrid Remedy but with consumer redress capped at the first hybrid cap (90% of the Commission Remedy) with a consumer redress payment of £755
 

Firms need to be certain that they are applying the FCA scheme calculations correctly, and with auditable records, so if they are challenged, they can demonstrate that consumer payments were worked out accurately and in line with the rules.
 

How can BDO help?

We have a ready-to-go, fully configurable loan-level calculator which has been successfully deployed to validate redress for clients with up to four million loans. Our technology is built using Python programming language, enabling it to efficiently calculate redress for large datasets.

The BDO Redress Calculator has been rigorously developed and meets our standards for submitting High Court evidence, which would be subject to expert counterparty review and cross examination. We can provide detailed documentation to support a separate validation you may wish to undertake as well as for exchanges with the FCA.

We can implement our technology to calculate customer redress on your behalf or to validate your existing calculator. Alongside the final redress calculation, the BDO Redress Calculator can produce intermediate outputs to describe the calculation stages as well as exception notifications. Our validation service includes identifying the causes of any discrepancies and working alongside you to facilitate the necessary calculator updates.

We are currently supporting several motor finance lenders with redress calculator design and assurance. If you would like help to navigate the final rules, implement your own calculator, or validate your existing tools please contact Jyrki Kolsi.

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